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It's The Economy, Everybody

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It's The Economy, Everybody
Gold took a breather today from its mini-rally although it rose a touch, despite a fall on almost every major stock index across the world. (Shanghai was the only winner, and that only because it had been drastically oversold.) 
In fact, just about everything was down today. Silver faltered. Crude was down. The 10-year U.S. Treasury yield was down. The euro and the pound were down against the dollar marginally. 
This is not a good sign for those who view "confidence" as an important market moving factor. 
But focusing on gold, should we believe one of the many dicta in trading that says, "Bounces in markets that are in downtrends tend to be shallow while declines tend to be sharp and significant"? Or should we believe that the equities correction that seems to be shaping up is a longer-term trend and will have positive effects on the price of gold? 
We find it hard to believe that all the prognosticators are wrong about world economic growth. We find it equally hard to believe that the $10 billion taper by the Fed last month and a potential for a similar tranche next week can have such a big effect that equities would start stumbling because of it.
What we are probably seeing is a classic stock market correction, one that will hit the reset button 7 to 10% below the previous highs before an upward climb based more firmly on fundamentals - like profits - resumes. 
Jodie Gunzberg, Vice President, Commodity Indices at S&P Dow Jones Indices said this about gold:
"The last time gold fell this much was in 1981 when it lost 32.8% and it took 25 years to recover its drawdown. Although in 1982, gold rebounded 12.5%, it lost another 32% in the next 2 years. If history repeats itself, it could take a long time for gold to recover but it could be viewed as a bump in the road of the long bull trend that has gained over 700% in the prior 12 years."
Low prices in gold have a tendency to force unprofitable gold miners to close up shop for a while until the price recovers. That in turn holds down the supply of gold, which of course, might push up the price. Or so bulls hope.
We're also looking at conditions going into the weekend that militate against holding positions for the two day trading hiatus. Next week, the Federal Open Market Committee meets and may or may not move to taper further. No one knows and, surprisingly, there has been little idle chatter from Fed members in the peanut gallery. So the thinking is a bit unclear.
The world economy is scarcely gasping for air at this point. As we pointed out to daily subscribers yesterday, for all the concern over China's manufacturing slowdown, eurozone activity was up somewhat dramatically and U.S. manufacturing has been a consistent bright spot in the world's largest economy. The U.S. is still the biggest manufacturer in the world (if precariously so), and the eurozone is roughly equivalent. Together they are more than double China's industrial output. Also, in other goods and services, the U.S. and Europe dwarf everything in sight. The contest is not even close.
So, when trying to keep our eye on the economic ball, the two ultra superpowers are what we should be watching. The European Central Bank is on the verge of an enormous stimulus package, one that will help the zone, though not as large as the U.S.'s three successive rounds of quantitative easing. Japan is also getting into the QE game. 
Speaking of QE, especially QE3, this year's big test for the Fed will be the unwinding of all the securities they have purchased. While it may seem counterintuitive, it may serve to keep interest rates way down, because a lot of the paper in the Fed house is not exactly of the highest quality and the paper has to be marketed.
So, we have a Friday with everyone catching their breath. But, hey, it's the economy once again. 

As always, wishing you good trading,


Gary S. Wagner - Executive Producer